1Comparative Financial Statement Analysis of HBL & MCB

ABOUT HABIB BANK LIMITED

HBL was the first commercial bank to be established in Pakistan in 1947. Over
the years, HBL has grown its branch network and become the largest private
sector bank with over 1,450 branches across the country and a customer base
exceeding five million relationships. With a presence in 25 countries, subsidiaries
in Hong Kong and the UK, affiliates in Nepal, Nigeria, Kenya and Kyrgyzstan and
representative offices in Iran and China, HBL is also the largest domestic
multinational. The Bank is expanding its presence in principal international
markets including the UK, UAE, South and Central Asia, Africa and the Far East.
Key areas of operations encompass product offerings and services in Retail
Banking. HBL has the largest Corporate Banking portfolio in Pakistan with an
active Investment Banking arm. SME and Agriculture lending programmes and
banking services are offered in urban and rural centers. In the UK and GCC, HBL
focuses on trade finance and remittances for the South Asian Diaspora in
addition to basic banking facilities. HBL has always been a bank and a brand for
the masses, with a history that is inextricably linked with the history of Pakistan
itself. As it continues to grow, both locally and abroad, it strives to embody its
brand personality: honest, approachable, and inclusive. HBL is currently rated
AA+ (Long term) and A1+ (Short term)*. It is the first Pakistani bank to raise Tier
II Capital from external sources.

HISTORY AND BACKGROUND

Habib Bank Limited was established by Mr. Ismail Habib (Late) on August 25,
1942 at Bombay. It was the first Muslim Bank of the sub-continent. It was
established with a paid up capital of Rs. 2.5 million. At an early stage, the
number of its branches was only 12.
HBL established operations in Pakistan in 1947 and moved its head office to
Karachi. Our first international branch was established in Colombo, Sri Lanka in
1951 and Habib Bank Plaza was built in 1972 to commemorate the bank’s 25th
Anniversary. With a domestic market share of over 40%, HBL was nationalized in
1974 and it continued to dominate the commercial banking sector with a major
market share in inward foreign remittances (55%) and loans to small industries,
traders and farmers. International operations were expanded to include the USA,
Singapore, Oman, Belgium, Seychelles and Maldives and the Netherlands.

PRIVATIZATION OF HABIB BANK

On December 29, 2003 Pakistan's Privatization Commission announced that the
Government of Pakistan had formally granted the Aga Khan Fund for Economic
Development (AKFED) rights to 51% of the shareholding in HBL, against an

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2Comparative Financial Statement Analysis of HBL & MCB

investment of PKR 22.409 billion (USD 389 million). On February 26, 2004,
management control was handed over to AKFED. The Board of Directors was
reconstituted to have four AKFED nominees, including the Chairman and the
President/CEO and three Government of Pakistan nominees.

MANAGAMENT HIERARCHY

PRESIDENT

BOARD OF DIRECTOR

MEMBER EXECUTIVE BOARD

REGIONAL CHIEF

ZONAL CHIEF

BRANCH MANAGER

BOARD OF DIRECTORS

NAME DESIGNATION

Sultan Ali Allana CHAIRMAN

R. Zakir Mahmood PRESIDENT & C.E.O
Mushtaq Malik DIRECTOR
Ahmed Jawad DIRECTOR
Yasin Malik DIRECTOR
Moez Jamal DIRECTOR

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3Comparative Financial Statement Analysis of HBL & MCB

A Bird’s Eye View

Year Important Event

1941 Commenced operation.

1942 Deposits reached 20 million rupees.

1943 Moved operations from Bombay to Karachi on the Quaid’s Request.

1946 First Banking Scheme Started for the Muslim Youth.

1947 HBL head office transferred to Pakistan.

1966 Silver Jubilee.

1974 Bank was Nationalized.

1991 Golden Jubilee

1997 HBL was Reorganized.

2004 HBL was Privatized.

2006 Largest Private Commercial Bank in Pakistan with branch network of 1477
branches within Pakistan and 65 international branches in 26 Countries.

2008 Declared best Bank.

2009  Pakistan’s Largest Banking Network .

 The Best Emerging Market Bank in Pakistan
 HBL among Top 500 Global Financial Brands

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4Comparative Financial Statement Analysis of HBL & MCB

International Correspondence
Bank maintains correspondent relations with the following international banks:
American Express Bank, USA; Banco Di Roma, Italy; Commerzbank and
Dresdner Bank, Germany; The Royal Bank of Canada, Canada; Hong Kong and
Shanghai Banking Corporation Ltd., Hong Kong. The bank follows the internet
banking code NetBanking and security is entrusted by VeriSign. This was
launched with a contract made with TPS, (Pakistan). The bank supports the
MNET Switch as a result of MoU signed between MNET and 1-Link.

Services
Bank AL Habib is one of the eleven partners of 1-Link system, an inter-bank ATM
sharing system which allows customers to transact on ATM of any partner bank.
Bank AL Habib is the third largest ATM service provider in Pakistan, having 188
ATMs while having the largest number of ATMs in the city Karachi.

Bank AL Habib Limited in affiliation with the Arab Financial Services offers two
types of Master Cards.

AL Habib Capital Markets

Bank AL Habib has also established a name in the financial stock industry. AL
Habib Capital Markets; one of the leading brokerage houses working under the
logo of Bank AL Habib. BAHL holds a major stake in the AL Habib Capital
Markets (Pvt) Ltd, rest by friends and family members.

Branches
The bank has a network of two hundred and twenty five branches.

Pakistan

• Karachi, has around 92 branches in all major/suburbs parts. This includes

one international branch at Export Processing Zone and one Islamic
banking branch at Sharah-e-Faisal.
• Lahore, has around 31 branches in all major/suburbs parts including an
Islamic Banking Branch.
• Multan, has around 5 branches including an Islamic Banking Branch.

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5Comparative Financial Statement Analysis of HBL & MCB

• Faisalabad. has around 4 branches including an Islamic Banking Branch.

• Islamabad, has around 4 branches.
• Hyderabad, has around 4 branches.
• and 30 other cities of Pakistan

Bahrain

• Manama has a branch which acts as an Offshore Banking Unit

SOME GLIMPSES OF ITS FINANCIAL SUCCESS

• HBL wins Best Emerging Market Banks award 2010

• HBL receives 3 Global Finance Awards

I. Best Bank – Pakistan,

II. Best Trade Finance Provider – Pakistan and
III. Best Foreign Exchange Provider – Pakistan.

• HBL among Top 500 Global Financial Brands

• 2008 HBL - 'Most innovative Global Trade Finance' award
• 2008 HBL Milestones - 'Buzziest Brands' Awards

Financial Highlights of 2010

The profit after tax of Habib Bank Limited (HBL) has increased to Rs 3.602 billion
in the quarter ended March 31, 2010 as compared to Rs 3.481 billion earned in
the corresponding quarter in 2009. The board of directors of the bank in its
meeting held here on Thursday declared the earning per share of Rs 3.96 in the
period under review against Rs 3.82 in the same period a year back.

According to the financial results sent to Karachi Stock Exchange (KSE), the
banks mark-up/return/interest earnings increased to Rs 19.156 billion against Rs
18.237 billion while non-mark-up/interest income surged to Rs 2.653 billion
against Rs 1.949 billion.The bank s mark-up/return/interest expenses increased
to Rs 8.551 billion against Rs 7.817 billion, the provisions and write offs
increased to Rs 1.388 billion against Rs 1.271 billion while operating expenditure
increased to Rs 5.907 billion against Rs 5.640 billion. The before tax profit of
HBL surged to Rs 5.964 billion in the first quarter of 2010 as compared to Rs
5.457 billion in the same quarter in 2009.

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6Comparative Financial Statement Analysis of HBL & MCB

ABOUT MCB
Over the years MCB has developed strong relationships with its customers by
understanding their needs and treating them with respect, dignity and
importance. The driving force behind its commitment and services is its focus on
customers, ensuring that it not only meets, but also exceeds their expectation.
MCB believe in achieving their mission and vision by working together as a
combine group. It treats its colleague as its internal customer and ensures that
the requirements of internal customer focus are always met. Equipped with in-
depth product knowledge and recognizing the strengths in each individual, It
strive for optimum-results from its co-workers and bringing out peak
performances by working towards common goals and objectives in today's
dynamic banking environment.
MCB has an edge over other local banks, as it was the first privatized bank. The
State Bank of Pakistan has restricted the number of branches that can be
opened by foreign banks, an advantage that MCB capitalizes because of its
extensive branch network.
Ten years after privatization, MCB is now in a consolidation stage designed to
lock in the gains made in recent years and prepare the groundwork for future
growth. The bank has restructured its asset portfolio and rationalized the cost
structure in order to remain a low cost producer.
MCB now focuses on three core businesses namely Corporate, Commercial and
Consumer Banking. Corporate clientele includes public sector companies as well
as large local and multi national concerns. MCB is also catering to the growing
middle class by providing new asset and liability products. The Bank provides 24
hour banking convenience with the largest ATM network in Pakistan covering 30
cities with over 225 ATM locations. The Bank’s Rupee Traveler Cheques have
been leaders for the past six years and have recently launched their Gift
Cheques Scheme.
MCB Bank Limited (Formerly Muslim Commercial Bank Limited) has a solid
foundation of over 50 years in Pakistan, with a network of over 900 branches,
over 750 of which are Automated Branches, over 225 MCB ATMs in 41 cities
nationwide and a network of over 12 banks on the MNET ATM Switch.
MCB has become the only bank to receive the Euromoney award for the fourth
time in the last five years. MCB won the "Best Bank in Pakistan" in 2005, 2004,
2003, 2001, and in 2000 the "Best Domestic Bank in Pakistan" awards. In

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7Comparative Financial Statement Analysis of HBL & MCB

addition, MCB also has the distinction of winning the Asia Money 2005 & 2004
awards for being "The Best Domestic Commercial Bank in Pakistan"
MCB offers a wide range of financial products and advice for Personal and
Corporate Customers. You can also apply on-line for many of our Online
Services. Customers can access their accounts using our simple and convenient
MCB Virtual Internet Banking services.

HISTORICAL BACKGROUND
Before separation of Indo Pak, the need for more Muslim banks was felt. And
Muslims having strong financial capacity were thinking to invest in this sector as
well. This was the idea, which paved the way for setting up Muslim Commercial
Bank Ltd. known as MCB. This was the third Muslim bank in the subcontinent.
This bank was incorporated under companies’ act 1913 on 9th July 1947 at
Calcutta. But due to changing scenario of the region, the certificate of
incorporation was issued on 17th August 1948 with a delay of almost 1-year; the
certificate was issued at Chitagong. The first Head office of the company was
established at Dacca and Mr. GM Adamjee was appointed its first chairman. It
was incorporated with an authorized capital of RS.15 million.
After some time the registered office of the company was shifted to Karachi on
August 23rd, 1956 through a special resolution, recently the Head office of MCB
has been transferred to Islamabad in July 1999 and Head office is termed as
Principal Office.
This institute was nationalized with other on January 1st, 1974. At that time it had
506 branches and deposits amounting to Rs.1.640 m. Although MCB has a
reputation of a conservative bank but nationalization also left its effects on this
institute as well and by end of year 1991 in which it was privatized the total
number of branches were 1.287 and deposits amounting to as high as Rs.35,029
m.
When privatization policy was announced in 1990, MCB was the first to be
privatized upon recommendations of World Bank and IMF. The reason for this
choice was the better profitability condition of the organization and less risky
credit portfolio which made'' it a good choice for investors. On April 8th, 1991, the
management control was handed over to National Group (the highest bidders).
Initially only 26% of shares were sold to private sector at RS. 56 per share

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8Comparative Financial Statement Analysis of HBL & MCB

REVOLUTIONS IN MCB
• Incorporated in Calcutta, India on 9th July 1947
• First chairman – Mr. G.M Adamjee
• Head office was shifted to Dhaka in August 1948
• Head office was shifted to Karachi in august 1956
• Nationalized on 1st January 1947
• Privatized on 8th April 1991
• Fist chairman after privatization – Mr. Mian Muhammad Mansha
• Head office transferred to Islamabad 1991.

BRANCHES & ATMs

MNET enables all the member banks to share their electronic networks. Which
means customers of member banks can use MNET as well as 1-Link ATMs
Nationwide. MNET member banks ATM machines accept cards issued by MCB
Bank Ltd, Citibank, Standard Chartered, HSBC, Saudi Pak Bank Limited, Habib
Metropolitan Bank, JS Bank, Deutsche Bank, SME Bank, Arif Habib Rupali Bank
and First Women Bank. MNET customers can use over 600,000 ATMs worldwide
that carry the logo and shop at over 5 million outlets that carry the logo. M-Net
switch has currently 612 ATMs in 50 cities. We plan to have the network grow in
faster pace in future as MCB itself will be adding more ATMs by the end of the
year. The ATM deployment has been planned in such a manner that a customer
will be only a few minutes away from an ATM in major cities. This coupled with
geographic coverage provides the largest convenient spread in the country,
because of which we are very strongly concentrating on Diverse Coverage &
Convenience.
M-Net Switch ATMs are present in all the major cities of the country. They are
available in the hilliest and northern areas of the country such as Murree,
Abbottabad and Swat etc thus providing convenience of accessing 24 hours cash
to the customers across the country. M-Net switch also has its Service Centers in
the main cities of the country providing support to member banks customers. M-
Net Switch ATMs are also present in all 3 main Airports of Pakistan i.e., Jinnah
Terminal (Karachi), Allama Iqbal International Airport (Lahore) & Islamabad
International Airport.
MCB is in it’s over 50 years of operation. It has network of over 1,100 branches
all over the country with business establishments in Bangladesh, Sri Lanka and
Bahrain. The branch break-up province wise is Punjab (57%), Sindh (21%),
NWFP (19%) and Baluchistan (3%) respectively.

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9Comparative Financial Statement Analysis of HBL & MCB

AWARDS

MCB bank Ltd. has also been awarded by the Euromoney Awards and the Asia
Money Awards. The prestigious Euromoney award has been given to MCB for
five times in the past six years.

EUROMONEY AWARD

• BEST BANK IN PAKISTAN 2005

• BEST BANK IN PAKISTAN AWARD 2004
• BEST BANK IN PAKISTAN AWARD 2003
• BEST BANK IN PAKISTAN AWARD 2002
• BEST DOMESTIC BANK AWARD 2000
ASIA MONEY AWARDS –

• THE BEST DOMESTIC COMMERCIAL BANK AWARD 2005

• THE BEST DOMESTIC COMMERCIAL BANK AWARD 2004

Board of Directors
• Mian Mohammad Mansha Chairman
• S.M. Muneer Vice Chairman
• Mohammad Aftab Manzoor President & Chief Executive
• Tariq Rafi Director
• Sheikh Mukhtar Ahmed Director
• Mohammad Arshad Director
• Shahzad Saleem Director
• Mian Umer Mansha Director
• Sarmad Amin Director

MANAGEMENT LEVEL
The organization chart within a department and in different offices is as follows:

Divisional Heads ………..……………………Head Office

Regional Head (EVP) ………..………………Regional Office
Zonal Head (VP) ………..…………………….Zonal Office
Branch Manager ………..……………………..Branch
(VP, AVP, GRADE 1, 2, 3)

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10Comparative Financial Statement Analysis of HBL & MCB

ORGANIZATIONAL STRUCTURE OF MCB

As MCB is a banking company listed in stock exchange therefore it follows all the
legalities which are imposed by concerned statutes Mr. Muhammad Mansha is
chairman & chief executive of the company with a team of 10 directors and 1
vice chairman to help in the business control and strategy making for the
company. Operational Management of the bank is being handled by a team of 10
professionals. This team is also headed by Mr. Muhammad Mansha. The
different operational departments are Consumer Banking & IT div; Financial &
Inter branch div; Banking operations div; HR & Legal div; financial control & Audit
div; Credit management div; Commercial Banking div; Corporate Banking div;
Treasury management & FX Group and lastly Special Assets Management
(SAM) Group.
For effective handling of branches, it has been categorized into three segments
with different people handling each category. These categories are:

a) Corporate Banking
b) Commercial Banking
c) Consumer Banking

Corporate Banking
These are branches which have an exposure of over Rs. 100nmillion. Usually
includes multinational & public sector companies.

Commercial Banking
The branches which has a credit exposure of less than Rs. 100 million but having
a credit portfolio of more than Rs. 20 million (excluding staff loans) Usually
branches in large markets and commercial areas come under this category.

Consumer Banking
These are the branches which have exposure up to Rs. 20 million and these
include all the branches which are neither corporate nor commercial branches.
Recently the organizational structure was re-designed as follows: Province wise
branches

Corporate Consumer Commercial

20 branches 637 branches 383 branches

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 11Comparative Financial Statement Analysis of HBL & MCB

Financial and Performance Analysis

Before formally starting ratio analysis it should be clear that typical ratios used t
judge annual performance of any corporations are altered to large extent when
being used for any bank, so here we will be focusing on some key ratios that will
tell us about profitability, liquidity, efficiency and debt structure of both HBL and
MCB and each ratio will be defined side by side in terms of its meaning and
methodology applied for its calculations.

Profitability:
Profit before tax ratio (PBT/ total income)
Years 2009 2008 2007 2006 2005 2004
HBL 39.72% 41.45% 36.63% 48.34% 42.09% 30.72%
MCB 55.91% 63.8% 70.16% 70.49% 62.80% 34.47%

Methodology of calculation of this simple ratio is not so simple which also make
interpretation little more complex, here total income means (NET Interest Income
before provisions + Non Interest Income) means two items i.e. Non Interest
expense and Provision deduction if added back nominator of ratio then this will
become cent percent. So in real this ratio is telling us that how much out of net
interest income (gross profit) and non interest income (fee, commission and
services charges etc) we are left with after deducting our provisions (in actual
NPLs expense) and paying for Non Interest expense (basically operating &
administrative expense). Here I m treating Interest expense as Cost of Good
Sold, as it is cost of material which a company sell or rent out so now lets come
on result interpretation we see here that MCB in 2009 was able to save almost
56 rupees out of total income and only 26 rupees out of 100 are spent on
administrative expenses and 18 on provisions. Where as HBL resulted only
33.72 for same year which mean 66.28 rupees out of 100 rupee of Net Interest
margin and Non Interest income are spent on administrative expenses and
provision further break down reveals that 16.8 are provision and 49.4 are spent
for administration. If we talk about provision it is to be made according to SBP
regulation so is the reason differences is only due to the fact that HBL have more
advances and investment that fall into criteria of non performance or provision
making means they have little less control as compared to MCB on their
Investments or advances in other words little inefficient in collections, but when
we come to non interest expense major difference lies here, MCB is able to
control its expenses relatively, may be in absolute amount it is more but relative
to earning MCB spend less on administration to earn same amount in
comparison to HBL. Now if we look to previous years we find out that in 2004 this
difference of profitability was minimized between both banks but both provision

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 12Comparative Financial Statement Analysis of HBL & MCB

deduction and non interest expense were relative to income are higher for HBL
however absolute income of HBL was higher in previous years compared to
MCB it still is higher but gap is minimized due to MCB rapid growth in 2005. We
also see here that year 2006 is the peak year as far this ratio is concerned, for
both banks this may be attributed to economy boom is that final conclusion can
be done after analysing few more ratios.

Gross Spread (NIM/Interest Income):

Years 2009 2008 2007 2006 2005 2004

MCB 69.31% 71.13% 75.26% 82.44% 84.34% 77.35%
HBL 56.09% 58.10% 62.06% 69.77% 77.34% 75.43%

This ratio is same as gross profit margin, but only difference is in GPM sales is
only single operating revenue so it is also thee base when doing common size
analysis of profit and Loss Account but here another operating revenue is from
fee and commissions which is mentioned as Non Interest income so while doing
common size base is sum of both interest and non interest income but as far this
ratio is concerned here we are just concerned with spread earned. Spread is the
earning of bank it is the difference between interest rates on which bank do
investment and give advances (usually higher) and rate on which bank get
deposits or borrowings. Now Spread earning is majorly due to interest rate
differential but also partially due to equity investment in earning assets means
that without borrowing banks do lend some of its money as well.

It shows that in 2009 MCB paid interest for its borrowing and deposit only
30.69% of its interest income which means that their interest income is 3.25
times of their Interest cost for the whole year whereas HBL cost of interest was
43.91 % of mark-up income which indicates that HBL earned only 2.27 of what it
paid as Interest cost to lenders and depositors, one very apparent reason for this
may be that HBL needs to ay high interest to attract depositors and to lenders as
a premium of higher risk in their operations as compared to MCB backed by
strong business group. If we look in previous years this ratio pattern is much
similar to above ratio which supports our two points that in 2004 difference of
profitability between both banks was less as compared to present and peak
years of performance was 2005 & 2006 for both banks. One point to remember
while looking this ratio pattern is that SBP prudential regulation about spread
effects both banks in similar pattern so can not be reason of difference in any
case.

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 13Comparative Financial Statement Analysis of HBL & MCB

Return on Equity:

Years 2009 2008 2007 2006 2005 2004

MCB 27.35% 31.49% 37.66% 45% 64.87% 28.73%

HBL 18.05% 24.72% 20.12% 32.90% 34.99%

In equity calculation for ROE minority interest and surplus on revaluation is not
included. Ratio of 2004 for HBL can not be calculated because average equity is
used in formula and data for 2003 for HBL is not available. Here it is simple to
interpret that increase or decrease in this ratio depends on two things a. Launch
of new share (increase paid up capital) b. increase/decrease in net income. If
increase in average paid up capital and reserve is more then net income then our
ROE will decrease and vice versa, Here tremendous increase in year 205 for
MCB is backed by reason of by 267% increase in net income this year which is
unmatchable for all 6 years. New equity is also launched so average equity rose
but that increase was smaller. MCB growing at higher pace launched equity each
year except 2008-07. However, HBL launched new equity in only two years 2008
and 2009. Thus MCB earned highest return on equity investment in 2005 and
HBL too went at peak in same year.

Return on Assets:

Years 2009 2008 2007 2006 2005 2004

MCB 3.25% 3.60% 4.06% 3.79% 3.20% 0.91%
HBL 1.65% 2.15% 1.57% 2.27% 1.90%

This ratio tells us how much earned out of each 100 rupee invested in assets if
looked in this aspect it also tells us who effectively assets are utilized to generate
income, again reasons for up and down are similar to ROE. MCB ROA increases
in 2005 due to greater increase in net income. Ratio of 3.25 means that MCB
earns 3.25 rupees on each rupee invested in sales

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14Comparative Financial Statement Analysis of HBL & MCB

Above chart is taken from IGI report and its figures very closely match our
results, so satisfying us as a prove of going in correct direction.

So if we do conclude profitability analysis we see that in year 2004 both banks

was having relatively same profitability but then banking sector boom starts
which reached its peak in year 2006-2007, and this boom MCB performed well
and grew by launch of new shares as well, as a result MCB is now out
performing HBL, although HBL still in absolute is larger then MCB in amount of
total assets as well as in amount of net income but when compare relatively then
MCB generates more profits out of its assets and out of its income by controlling
costs more effectively. Common size analysis will make picture more clear by
showing that MCB controls non interest expense relative to revenues better then
MCB.

Managerial Efficiency Measure:

Income/ Expense Ratio (times)

Years 2009 2008 2007 2006 2005 2004

MCB
3.84 4.10 5.06 4.01 3.12 1.62

HBL 2.30 2.42 2.28 2.50 2.05 1.68

This ratio in my opinion is one of the best measures of operational efficiency;

here income stands for the same accounts as for PBT/Income ratio described
above (i.e. net interest margin plus non interest income) and expenses in this
ratio takes into account only Non-Interest Expense. Consider the fact that interest

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 15Comparative Financial Statement Analysis of HBL & MCB

expense is just Cost of Goods Sold it is just the cost bank pays for its borrowing,
this ratio compares that how many time is bank management able to earn for
each dollar they spend on non interest expense that includes salaries,
administration stationary, equipment, and SBP penalty costs etc. Now let’s
interpret the results MCB makes 3.84 rupee earning against each 1 rupee spent
in such costs as compared to 2.3 rupee earned by HBL management, so in short
MCB comparatively is more efficient this can be explained better by saying that
for earning 1 dollar in earning MCB spend less in such expenses as compared to
HBL, but again if we look back in time we see that in 2004 both banks have same
scenario but MCB rapidly became efficient. Year 2007 was best for MCB in point
of efficiency in expense however; year 2006 was the peak for HBL as it was for it
in profitability analysis as well.

Earning Assets to Total Assets:

(Efficiency & Liquidity Analysis)

Years 2009 2008 2007 2005 2004 2003

MCB 87.23% 85.7% 83.6% 85.54% 87.34% 86.88%
HBL 87.02% 88.80% 87.60% 89.32% 94% 94.23%

Better interpretation out of this ratio needs understanding before. Banks do have
two main categories of assets. 1. Earning assets includes all those assets that
earn Mark-up/Interest returns for the bank. These include deposit accounts of
bank with other banks, advances, and investments. All these assets earn
income. However, to invest in these assets bank needs few other assets which
include operating fixed assets (equipment, Building and furniture), cash holding
(also a PR from SBP). One point to note is that provisions are not excluded while
calculating earning assets. Now we can say that this ratio depicts that how
efficient bank is to invest in earning assets by keeping investment in non earning
assets with in certain limits. Means it will be efficiency of bank in my opinion that
if they want to raise their earning asset by certain amount they need less
investment in non earning assets. An other interpretation can be who much bank
want to keep its investment in liquid or current account to keep them able to pay
their obligations i.e. (current accounts, deposits and borrowing). Now better
analysis can be done if we look separately to cash and balance with other banks
and separately to operating fixed assets. Now if we have a close look it tells us
that HBL investment in fixed assets always remain lower than 2% as compared
to 4 % of MCB, so we here say that HBL in this six year period seems efficient to
invest in earning assets with relative lower investment in building and fixed asset.
However when we see liquid non assets holding HBL is increasing its investment
in current account balance with other bans and in cash holdings probably
because they do have poor earning assets and have some fear of defaulting on
deposits, in comparison MCB remain constant in its cash holding and balances
with other banks. This can be seen in common size analysis of balance sheet.

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 16Comparative Financial Statement Analysis of HBL & MCB

Total Revenue to Total Average Assets:

Years 2009 2008 2007 2006 2005

MCB 16.78% 15.10% 13.99% 14.30% 11.30%
HBL 10.76% 10.99% 9.44% 9.32% 7.91%

This ratio is simply Total Assets Turnover, telling us that by investing in assets
rupee 1 how much bank increases its revenue. MCB management is bringing up
relatively more revenues from usage of its assets, this revenue may be mark-up
income of ay be fee or commissions. Each 1 rupee in invested in assets is giving
16.78 passa in revenues to MCB in 2009, however HBL is getting 10.7 passa out
of each 1 rupee in assets. we see that both banks are increase their TAT this is
due t interest rate rising and increasing fee and commissions although increasing
trend is visible but MCB is again at lead since 2005 and is still more competitive
although in absolute amounts MCB have lower assets thus lower revenues then
HBL but efficiency is no doubt much higher then HBL.

Assets Quality Analysis:

NPL to Gross Advance Ratio:

Years 2009 2008 2007 2006 2005 2004

MCB 8.62% 6.7% 4.67% 4.14% 4.46% 6.14%
HBL 10.09% 8.26% 6.86% 8.08% 11.80% 15.20%

NPL stands for non performing loans. It is different from provisions, provisions
are based on estimations and made according to SBP regulations however
NPLS are actually loans that are default on payments. Advances are major loan
investments on which bank receive mark-up, other main category is investments
but it basically is investments in equity of corporate sector. So we calculate NPL
to advances ratio that tells us that how many of our total earning assets are in
category of getting default. Advances are such a major category that it makes up
around 70% of interest income of MCB as shown by following figure from MCB
annual report.

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17Comparative Financial Statement Analysis of HBL & MCB

So now interpreting these ratios we can say that 8.62% of MCB advances are not
performing properly on due date in comparison HBL asset quality is little
deteriorated and have 10.09% in non performance loans. In 2005 which was also
profitable year with respect to ROE, and NPL percentage for both banks reduced
means economy was at boom and less loans were out performing, then we see
that till 2007-2006 economy was in better condition so NPLs remain low but then
recession started, lay offs and shut downs captured our corporate sector so
corporate customers started defaulting again and both banks ratio again rose.
But in all six years HBL have higher percentage of loans relatively in non
performance.

Figure on next page is from IGI securities research on HBL

May 2010
 18Comparative Financial Statement Analysis of HBL & MCB

This figure is proving that our results are perfect and here we see that MCB
stood best in its NPLs, bank can control it NPLs to remain low by having better
negotiations and terms and conditions for restructuring loans and offering more
attractive services to keep customers loyal and honest.

Debt Paying Ability

Advance/Deposits Ratio:

Years 2009 2008 2007 2006 2005 2004

MCB 68.89% 79.39% 74.96% 77.0% 78.63% 62.12%
HBL 66.59% 76.43% 71.93% 76.11% 73.26% 64.03%

As told above that advances are main loan bank give to corporate and consumer
sector and gets mark-up on it which is about 70 % of interest income on other
side deposits are core source of money that bank further invests and main mark
up interest paid is on deposits. Deposits are above 70% of bank assets so
second source of money is borrowing which is around only 7% of bank assets.
Banks do not invest all of the deposits in loans they do keep part of that deposits
and capital for liquidity requirements and do invest part of it in other earning
assets like investment in stocks. But advances are such earning assets which
are most illiquid, means bank is not free to cash out them in time of need. Even if
they perform on time bank receive its contractual payments as pre decided by
both parties. All other earning assets are more liquid. Investments are of three
types
a. Available for sale
b. Held for trading

May 2010
 19Comparative Financial Statement Analysis of HBL & MCB

c. Held to maturity.
Out of these only type c is not much liquid and that was also decided by bank
management it self. So purpose of finding out this ratio is to see what
percentage of deposits bank management is incvesting in advances and how
much of it bank is keeping in other liquid earning assets or cash requirements.
This will tell us about how much aggressive style bank has and also this ratio will
tell us banks confidence in their advances. If they have less NPLs they will invest
heavily in advances to earn higher return because they know that they can
handle clients and get payments on time to fulfil depositor requirements. We see
in 2005 both banks ratio jumped a different reason for this is that economy
boomed and corporate sector needed financing to in invest so they did
borrowing, but in this year MCB have been more confident for its loans as also is
evident from decreasing NPLs so they invested aggressively. Later till 2008 both
banks remain same but MCB with upper hand probably because they know that
their payments are on time and they will not default. But HBL maintained a
cushion for its depositors to be on save side. In 2007 and 08 we see that NPLs
increased largely due to slump in industry and may be most of depositors are
also cashing out with speed due to situation of inflation in and lower salary in
economy so banks come to conservative approach again with MCB little more
confident on its loans

Earning assets to Deposits & borrowings:

(Long-Term Analysis)

Years 2009 2008 2007 2006 2005 2004

MCB 107.74% 107.75% 103.52% 103.99% 101.65% 98.47%
HBL 102.23% 104.53% 102.70% 102.30% 106.45% 105.90%

This ratio tells us that Interest income of bank is not only due to
spread(difference in rate of interest on advances and deposits), partial of net
mark-up income belongs to higher investment in earning assets as compared to
money of other people with bank on which they pay interest. Means that owner
do have invested part of their own share in earning assets and kept part of it for
liquidity obligations.
Taking reciprocal of above ratio tells us that MCB investment in earning assets is
92.8% financed by borrowings and deposits and rest 7.2% is from equity. In other
words we can say for each rupee lend in market they have to pay 92.8 passa to
depositors and 7.2 passa to owners. Saying directly on each rupee borrowed
from someone (deposits are also borrowing) MCB have given loan of 107.74
It is some what difficult to reach at final conclusion out of this ratio but two ways
of looking at this is that it is better for depositors to think that if we have to take 1
rupee of ours from bank it also have to take 1.07 from the market means they will
be able to return our money because more then our money they have to collect
from market.

May 2010
 20Comparative Financial Statement Analysis of HBL & MCB

An other but remember less common interpretation can be that our bank have
invested so aggressively in market that they may have less liquidity to pay us
now, but this is not the case banks have to maintain liquidity requirement, this
ratio depicts that bank will not default on our principle payment since they do
have excess money available for collection.

Capital Adequacy Ratio:

(Risk Analysis)
Years 2009 2008 2007 2006 2005 2004
MCB 19.07% 16.28% 16.75% 18.65% 12.54% 9.64%
HBL 18.20% 15.60% 13.30% 12.80% 9.90%

This ratio is internationally used to measure bank health for its depositors. It is
basically calculated by dividing bank Tier 1 and Tier 2 capital with risk weighted
assets.
Risk weighted assets are calculated by assigning a risk weight to each asset (for
example 100% for corporate loans and 50% for mortgage loans). Capital is a
cushion for absorbing loss before it reach borrowers and depositors. So by
calculating CAR and comparing it basically bank is telling that in events of loss
we are able to absorb loss of this much percentage befor any loss is transferred
to depositors.
Thus a ratio of 19.07% means that even if MCB risky assets value decrease by
19% or upto 19.07% of them default till ten bank will be able to pay depositors
from the money of bank wners in other words caital or reserve created for
cushion.
In each country there is a minimum requirment of this ratio. In pakistan it is
8%.so both MCB and HBL are over capitalized. But again MCB is at advantage.

Following Figure is again from IGI research report of 2006 ehich is supporting our
results as well.

May 2010
21Comparative Financial Statement Analysis of HBL & MCB

Vertical and Horizontal analysis of HBL/MCB Profit &

Loss Statement
HBL revenues earned from mark up have decreased steadily from 2004 to 2009.
Throughout the analysis period the growth in mark up revenue has decreased
this is due to the decrease in growth of advances which went down to 0.37%
decline in 2009. On the other side mark up expenses had also followed the same
trend for the same period. It came down to a negative growth of 25% while 2008
is the only year where growth in revenue has decreased while mark up expenses
for the same period has increased very largely. This may be due to slump of
financial institutions in 2008. The default of bad loans has major effect on the
increase of mark up expenses. This is because HBL has disbursed loans on
lower mark up and their borrowing cost or financing cost for loans that they have
taken from other financial institutions was higher. Although we can see that this
effect was mitigated in 2009 and their performance is back on track with an
increase of 41% in mark up revenues while mark up expense increase only by
2.70% which is a healthy sign for HBL. There was steady increase in net mark up
after provision till 2006 but in 2007 the growth in net mark up after provision
decreased to -16% which is because of massive increase in provision for loan
losses. The growth in Net interest revenue was almost 22% in 2009 while
average NIR growth was 35% for TIER 1 banks this may be attributed to the
decrease in growth rate of advances to -0.2% in 2009 from 19% in 2008. The
loan growth in 2009 has declined to -13.50%.
HBL's non mark up income grow at significant increasing rate from 2006 i.e. 8%
to 18% in 2007 and again increasing by 63% in 2008 when eventually it fall down
to a negative growth of 31% in 2009. This is why we can see that non mark up
income as percentage of revenues declined subsequently from 2004 when it was
35% to 19% in 2005, 16% in 2006, 16% in 2007 and increasing to 20% in 2008

May 2010
22Comparative Financial Statement Analysis of HBL & MCB

while again decreasing to 9% in 2009. This is because banks investment in

shares and other corporate instruments has declined in these years.
This is because HBL's major revenue was contributed by income from mark up
and in these years mark up has raised which widened the spread and ultimately
there revenues increased. However it may not be as favorable when the spread
decline. In such situation only banks that will survive will be those who have
established alternative non mark up based revenue sources.
Deposit growth ratio has been slow because of the base effect as well as the fact
that HBL's advance to deposit ratio has been low and there was room to gear up
balance sheet without much deposit growth.
While non mark up income of MCB has always been on the lower side of HBL i.e.
maximum income from non mark up sources was 34% in 2004 while on the lower
side it was 10% in 2009 which was better that that of HBL in the same year by a
tiny percentage.
The non mark up expenditure has been growing sharply from 2007 when the
growth was 16% in 2008 it increased to 21% which declined to 6% in 2009. In
2006 non mark up expense was 30% of total revenues. In 2007 it was the same
while decreased to 27% in 2008 and 19% in 2009. The major reason behind this
high proportion of expenses was due to high expenditure on employees'
retrenchment and voluntary separation scheme (VSS) as well as increase in
technological expenditures, which is expected to be the same in coming few
years. Source: IGI

On the other hand MCB's non mark up expenditure remained lower than that of
HBL. It was 28% in 2005, gradually decreased to 16% in 2007 and again
increased to 19% of total revenues in 2009 which still lower than that of HBL.
However this investment in technology may give benefits to HBL in future.
Profit after taxation increase by high margin in 2008 but in 2009 they failed to
perform and growth in profit after taxation was negative. In 2007 profit after tax
was 16% of total revenues which increased to 19% in 2008 and again decreased
to 11% in 2009. They enjoyed the benefits of high spread in 2008 which
increased their profit while in 2009 when the spread was lowered their profitability
started to decline. They should have looked for other means of income rather
than only relying on spread. On the other hand MCB's profit after taxation has
been large throughout the analysis period. It was 39% in 2006, 40% in 2007,
34% in 2008, and 27% in 2009 still better than that of HBL. We can say that HBL
did not focused on alternative ways of earning money and relied on the spread
while MCB started to increase their investments and that’s why MCB has been
successful in sustaining their profitability even in the event of economic
recession.
Still we cannot link every downfall in the banking business to the economic slump
because our country was not much affected and state bank of Pakistan has
mitigated the effect by injecting money into the market.
Now the main point is that Banks remained focused on quick profit-making in the
first seven years of this decade which eventually landed them in a situation
where they failed to expand deposit base on the one hand and find ways of least

May 2010
23Comparative Financial Statement Analysis of HBL & MCB

risky yet highly profitable areas of lending. If they were been successful in
securing their position and not going for short term gains they would have been
in a much better position.

Vertical and horizontal analysis of HBL/MCB Balance

Sheet
HBL's bank balance with treasury bank has increased with a steady growth. It
reached to its peak in 2009 with a growth rate of 41% this means they are relying
on depositing their cash with treasury bank rather than depositing with other
banks, while this percentage has decreased in 2009. The growth in bank balance
with treasury bank was very high from 2008 to 2009 which is 41% while it was
1.8% in 2008. As a result the percentage of total assets as cash with treasury
bank has increased from 7.4% in 2008 to 9.4% in 2009. This means that their
asset base is increasing so they had to maintain a greater portion of their assets
with the treasury bank. On the other side the growth in cash with treasury bank of
MCB has increased steadily. But their deposits with other banks is increasing
very slightly which is 0% of total assets in 2005 and increased to only 1% in
2009. While the same ratio for HBL is increasing with high rate i.e. by 24% in
2008 to 3% in 2009 while it is 5% of total assets in 2008 and 4% of total assets in
2009 still it is better than that of MCB for the whole analysis period. Now if we go
through all these changes we see that balance with treasury bank is the almost
the same for both banks i.e. round about 8%-9% of their total assets from 2005-
2009 which is because of the statutory liquidity requirement and cash reserve
requirement of state bank of Pakistan. The change in these percentages is due
to amendments in state banks prudential requirements. So we can say here that
both of them has maintained their CRR and SLR requirement while the
differential point to note is regarding their policies to deposit with other banks. We
see that MCB maintained a very short proportion of their total assets with other
banks, almost neglible figure and increase in this proportion was also neglible
which means MCB does not feel comfortable to deposit their money with other
banks or they have other higher return investment opportunities so they are
following aggressive policy regarding using their assets and their low growth in
this part shows they have no intentions to change their policies and attitude.
Which we can see by looking at the increase in the proportion of advances and
investments as percentage of total assets. While HBL did not follow the same
strategy and they always retained greater part of their assets with other banks
than that of MCB. Like in 2006 it was 6.02% of total assets while in 2007 it was
6% still a major portion of assets. This shows that HBL is not as aggressive in
investment decisions as we can see that in 2008 the proportion of investments
and advances almost remained unchanged while it decreased in 2009.
HBL's lending to other financial institution has been very much deviant in the last
three years it decreased by 75% in 2007 while it increase by 280% in 2008 and
then again it decreased by 13%. While the proportion of lending to financial
institution as total assets have always been stable but since 2008 it has

May 2010
24Comparative Financial Statement Analysis of HBL & MCB

decreased. MCB's lending to financial institution had also followed the same
trend so this may be due market average and norms, and their attitude towards
investing in other financial institutions.

Another major element to focus is on investment and advances. We see that the
growth in investment of HBL increased by 48% in 2007 while their growth was
negative in 2008 i.e. round about 22% while it again increased by 56% in 2009.
Investments include investment in stocks of companies, associates, TFCs and
bonds. Investments were 20.30% of total assets in 2005 while it slightly
decreased to 20.26% in 2006. And in 2007 it again increased to 20.30%. But due
to financial slump of 2008 it again decreased to 18% of total assets. But when
the shades of economic recession started to eliminate bank revived its
investments to 25% of total assets in 2009 which is a healthy sign. Another thing
to notice is the portion of advances and its growth throughout the analysis period.
We see that the growth in advances from 2005 had followed a steady growth rate
i.e. 10% in 2006 while 9% in 2007 and increasing again to 19% in 2008 even in
the event of financial slump.
Advances were almost round about 60% of total assets for all the three years
from 2006-2008 while it decreased to 52% in 2009. One point to note here is that
even in the period of financial slump the demand for advances increased while
only investment in corporate sector was effected by that event. So we can say
that throughout the period HBL's advance base has been their core strength of
the bank and they heavily relied on consumer banking.
While on the other side MCB's investment in shares, TFC's and bonds has
increased steadily and the portion of total assets utilized in investment was more
than that of HBL throughout the analysis period. Like in 2005 investments were
28% of total assets while investment proportion of HBL was only 20% of total
assets for the same year. MCB continued on increasing the portion of investment
and reached to 33% of total assets in 2009 while the same percentage for HBL
was only 25% in 2009. This means HBL is focusing on consumer banking while
MCB is focusing on investment in shares and bonds and their intentions are
increasing year by year.
On prominent thing to note is that in 2008 after the event of financial slump HBL
decreased it advances base and increased its investment in corporate sector.
This shows that their focused has been changed from targeting corporate sector
rather than relying on consumer loans and advances.
Loan defaults remained high in the last fiscal year also due to a slump in
domestic economy that had an adverse impact on corporate profitability as well
as on consumption demand. Another factor behind high rates of loan defaults
was that in the preceding years banks had made excessive irresponsible lending,
particularly in consumer sector to earn unusually high margins. As a result,
banks’ overall non-performing loans grew to Rs398 billion or 11.5 per cent of
their overall loans in June 2009. (www.dawn.com, Nov 09, 2009)

May 2010
25Comparative Financial Statement Analysis of HBL & MCB

HBL's borrowing from financial institution has increased significantly in 2005 and
2006 from 18% growth to 61%. However the growth decreased to 4.6% in 2007 it
decreased to -20% in 2008 in contrast we can see that HBL's lending to financial
institution has increased by a significant growth rate i.e. 280%. This shows that
bank has been able to mitigate its risk by not relying on other financial institution
to increase their asset base by borrowings from financial institutions. While in the
same year they were aggressive in lending their money to other institution and
investing their money for higher returns. Because 2008 was the year when mark
up rates and inflation rate was highest in the history. Comparing to 16 countries
mark up rate Pakistan was on the top. In Pakistan, the discount policy rate had
been gradually raised from 8 per cent to 15 per cent in last three years. The
inflation had also grown in parallel with the mark-up growth during the past three
years and jumped up from 10 per cent to 25 per cent. While we can see that
borrowing as a percentage of total liabilities was round about 6%-7% from 2005-
2009 while 2007 was the only year where this percentage increased to 9% after
which it started to decline. It means HBL kept smaller percentage of their
liabilities as borrowings from other banks. While on the other side we can see
that growth in MCB's borrowings has increased significantly throughout the
analysis period. We see that MCB kept 9% of their liabilities from borrowings
from other institutions while this percentage was 10% in 2007 which decreased
to 5% in 2005 while again increased to 9% in 2009. Comparing all this we can
say that in 2008 when there was highest mark up rate in the country they did not
borrowed from other financial institutions but HBL was more successful in doing
so as their borrowings from other financial institutions was low percentage of
their total liabilities.
Deposit growth of HBL has been steady since 2005. It was 6.9% in 2005 while in
2008 it was 12% which continued to increase to 14% in 2009. They have been
successful in increasing their deposit rate but the growth rate was not significant
as compare to market average. Their deposits were 82% of their total liabilities in
2005 which was stable in 2006 but after that it continued to decrease to 77% in
2007 and again increasing to 79% in 2009. MCB's deposit base as compare to
HBL was a bit low. As it was highest in 2005 i.e. 85% of the total liabilities after
which it decreased to 71% in 2007. It again increases to 74% in 2008 and then
again decreased to 71%. It is clear that MCB's deposit base is lower than that of
HBL, although deposit base of all banks has been low since 2008 but still HBL
managed to perform well. Their profitability still increased because of their
investment in other corporate areas.
Deposits of banks increased to Rs4.162 trillion in September 2009 showing a
year-on-year growth of 10 per cent—better than 9.15 per cent a year before but
far below an average growth of 18.5 per cent between 2002 and 2007.
Deceleration of deposits’ growth can be attributed, to some extent, to a decline in
GDP growth rates but primarily it reflects banks’ failure to offer reasonable rates
of return and flight of capital in the wake of the war on terror and a general
breakdown of law and order. Average deposit rate of banks stood at 6.3 per cent
in September 2009, down 150 basis points from 7.8 per cent in September 2008.
(www.dawn.com, Nov 09, 2009)

May 2010
26Comparative Financial Statement Analysis of HBL & MCB

Savings to GDP ratio stood at 13.4 per cent in FY08. It improved marginally to
14.3 per cent in FY09—thanks to an increase in public savings, but was still too
low to facilitate the government in reducing its external borrowing requirements.
Banks remained focused on quick profit-making in the first seven years of this
decade which eventually landed them in a situation where they failed to expand
deposit base on the one hand and find ways of least risky yet highly profitable
areas of lending.

Market Look and Final Conclusion:

MCB have 691 million shares outstanding in market with capitalization of 151,822
million and share price of 219 on 31 December 2009. Its current share price is
207 rupees on 10 may 2020. However when we look at HBL its current
outstanding share are 1001 million but still its market cap is below MCB it is only
106, 630million with current share price of 106. So we can look at that although
MCB is larger in terms of share outstanding but investor expectation about its
performance is far below as compared to MCB as evident from Share price. If we
look in absolute amounts HBL outperforms with hundreds of more branches and
more market share of both deposits and advances as shown in following figure
from IGI securities report but MCB with small number of fixed assets and small
market share is more profitable then HBL due to its managerial efficiency and
less NPLs as evident from ratios.

May 2010
27Comparative Financial Statement Analysis of HBL & MCB

MCB is also efficient in controlling its cost of administration and operations more
effectively and earns more of its revenues from earning assets and less from
commissions and fee, however HBL comparatively earning larger percentage of
revenues from commissions, from this we may can say that MCB may be
focusing more on corporate financing where as HBL on consumer thus charging
higher servicing, another way my be that MCB is little more aggressively and
rapidly growing thus to attract more customer and enhancing market share they
may be offering discounted services to customers. When we talk about liquidity
of risk analysis we look at CAR and both banks are maintaining a big cushion to
absorb loss out of their risky asserts, again with MCB little better cushion not
because of more capital but because they are less riskier and have less NPLs.in
terms of cash and current accounts both banks are at good liquidity position to
satisfy their depositor cash needs. HBL maintains more liquidity as they being
aware of their risk of earning assets.
We do have positive future expectations from MCB, but this not at all means that
HBL will be out of seen; no doubt they are competing well in analysis period and
one of the giant market leaders in banking industry.

May 2010
28Comparative Financial Statement Analysis of HBL & MCB

References:

• www.Dawn.com
• Stock Exchange
• Annual Reports of HBL for years 2004-2009
• Annual Reports of MCB for years 2004-2009
• IGI

May 2010